Readers of this blog will know that there has been a renewal of this debate in various articles and papers in the last few years. This was partly inspired by an article by MH in the American socialist journal, Monthly Review (see at end of this post) in which he presented several (old) arguments claiming that Marx’s law was: logically inconsistent or indeterminate; that it could not be validated by empirical evidence; and anyway it was irrelevant to a theory of crises under capitalism. In sum, MH concluded that there is no Marxist theory of crises.

Several of us who reckon that Marx’s law of profitability is the basis for a Marxist theory of crises and is also the best and most powerful explanation have taken MH up on these points (see papers by me, G Carchedi, Andrew Kliman, Ed George, Esteban Maito and Sam Williams at the end of this post). We reckon Marx’s law is logical and consistent based on some realistic assumptions; that it can be validated by empirical work; that there is no plausible reason to assume Marx dropped the law that he had regarded as the most important in political economy; and that Engels’ editing of the Volume3 manuscripts was perfectly reasonable.

What I said
The Berlin debate was a new opportunity to discuss the issues in front of about 150 people or more. I kicked off and basically this is what I said.
First, I raised: why do we care about the theory of crises? It may seem that there is an obvious answer to this question. But not necessarily, as indeed some in the audience wondered whether this was just an obscure academic debate, when what activists needed to know was what happening in the world economy now and how we should respond to the Great Recession and the attacks on labour globally.

Well, I said that we need to have a theory of crises under capitalism that makes sense because these crises cause huge damage to people’s livelihoods and stop human social organisation moving towards a world of abundance and not scarcity and toil. And they are indications of the contradictory and wasteful nature of the capitalist mode of production. Before capitalism, crises were products of scarcity, famine and natural disasters. Now they are products of the fetishism of a profit-making money economy: they are man-made and yet appear to be out of the control of man. Above all, crises show that capitalism is fatally faulty and they expose capitalism as a failing system despite the great strides in the productivity of labour that this mode of production has generated in the last 200 years or so. So it matters.

So did Marx have a theory of crises? Well, Marxist scholars and economists as well as activists have found several theories of crises in his works, all of which have got more support than Marx’s law of profitability, actually. There is the view that capitalism goes into slumps because of the lack of demand from workers because their wages are too low to buy the goods that capitalists sell (underconsumption). There is the view that capitalist blindly produce too much relative to potential profits or demand so there is a collapse (overproduction); and there is the view that capitalism accumulates in an imbalanced way so that sectors get out of line, leading to collapse that spreads generally (disproportion). Finally, there is the view that crises come about because profits are squeezed by too high wages (profit squeeze). But I and others who hold to a Marxist theory of crises based on the law of the tendency of the rate of profit to fall reckon that these other theories are a wrong interpretation of Marx’s view on crises and that he also dismissed them. We start from the view that in a profit-making economy, surely crises must be caused by something that goes wrong with profits, not wages, not demand and not imbalances.

Marx’s law is two-sided. There is a tendency – ‘the law as such’ – and then there are countertendencies. But the law holds that these countertendencies will not overcome the law as such (the tendency) ultimately or over time. “They do not abolish the general law. But they cause that law to act rather as a tendency, as a law whose absolute action is checked, retarded and weakened by counteracting circumstances.” – Marx.

The law as such (that the rate of profit in capital accumulation will eventually fall) is based on just two realistic assumptions. The two assumptions are: 1) the law of value operates, namely that value is only created by living labour; and 2) capitalist accumulation leads to a rising organic composition of capital. These two assumptions (or ‘priors’) are not only realistic: they are self-evident. On the first, even a child can see that nothing is produced unless living labour acts. The production of use values is necessary to create value. “Every child knows a nation which ceased to work, I will not say for a year, but even for a few weeks, would perish.” Marx to Kugelmann July 11, 1868.

A rising organic composition of capital under capitalism over time is also self-evident. The huge increase in labour productivity under capitalism is a result of mechanisation. Yes, that can create new jobs, but it is essentially labour-shedding process. And while a new means of production might contain less value that an older similar means of production, usually means of production are replaced by a new and different system of production, which contains more value than the value of the means of production they have replaced. As Marx explains in the Grundrisse: “What becomes cheaper is the individual machine and its component parts, but a system of machinery develops; the tool is not simply replaced by a single machine but by a whole system… Despite the cheapening of individual elements, the price of the whole aggregate increases enormously”. Capital needs higher productivity but gets it through new labour-shedding means of production.

But the rate of profit has not fallen (and does not fall) in a straight line. There are counteracting influences to the law as such. They include: a rising rate of exploitation; the cheapening of constant capital values; wages dropping below the value of labour power; foreign trade for higher profitability for national capitals etc. But Marx says these counteracting factors “do not do away with the law but impair its effect. The law acts a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced.”

The main countertendency, a rising rate of surplus value, cannot overcome the law as such indefinitely. First, there is a limit to the rate of surplus value (24 hours in a day) and there is no limit to the expansion of the organic composition of capital. Second, there is a ‘social limit’ to a rise in the rate of surplus value, namely labour and society sets a minimum ‘social’ living standard and hours of work etc.

Marx’s law is not only logically consistent, given those realistic assumptions, it can be empirically validated. The empirical questions are: does the rate of profit fall over time as the organic composition of capital rises? Does the rate of profit rise when the organic composition falls or when the rate of surplus value rises faster than the organic composition of capital? Does the rate of profit rise, if there is sharp fall in the organic composition of capital in a slump? There is plenty of empirical evidence to show that the answer is yes to all these questions: for the US economy and, more recently, for the world economy.

Basu and Manolakos (http://gesd.free.fr/basumano.pdf) applied econometric analysis to the US economy between 1948 and 2007 and found that there was a secular tendency for the rate of profit to fall with a measurable decline of about 0.3 percent a year “after controlling for counter-tendencies.” In my work on the US rate of profit, I find an average decline of 0.4 percent a year through 2009 using the latest data (see http://gesd.free.fr/robcarch13.pdf). The inverse correlations between a rising organic composition of capital and a falling rate of profit are high (the law as such); but they are low between the rate of surplus value and the rate of profit (the counteracting factor).

Indeed, I argue that the law leads to a clear causal connection to regular and recurrent crises (slumps). It goes from falling profitability to falling profits to falling investment to falling employment and incomes. A bottom is reached when there is sufficient destruction of capital values (writing off plant and equipment, bankruptcy of companies, reduction in wage costs) to raise profits and then profitability. Thus there is a cycle of boom and slump driven by the law of motion of profitability.

The evidence of this causality is available for the US. Tapia Granados (http://deepblue.lib.umich.edu/handle/2027.42/91021), using regression analysis, finds that, over 251 quarters of US economic activity from 1947, profits started declining long before investment did and that pre-tax profits can explain 44 percent of all movement in investment, while there is no evidence that investment can explain any movement in profits. And we can see in the graph below, that the movement in US corporate profits led the movement in investment before, during and after the Great Recession.

And Marx’s law of the tendency of the rate of profit to fall makes a fundamental prediction: that, over time, there will be fall in the rate of profit globally, delivering more crises of a devastating character. And great work has been done by modern Marxist analysis that confirms that the world rate of profit has indeed fallen over the last 150 years (http://gesd.free.fr/maito14.pdf). Here is a graph of the work of Esteban Maito on a world rate of profit.

So the law predicts that eventually the rate of profit will fall and this will lead to a series of crises. And, as the organic composition of capital rises globally, the rate of profit will fall, despite counteracting factors and despite successive crises. This shows that capital as a mode of production and social relation is transient. It has not always been here and it has ultimate limits, namely capital itself. It has a use-by date. That is the essence of the law for Marx.

MH has argued in his work that Marx dropped the law as being useful in any way in the 1870s when he too found it illogical and irrelevant to crises. This seems a strange conclusion. Did Marx really change his view from a letter to Engels in 1868 that the law “was one of the greatest triumphs over the asses bridge of all previous economics”? And did Engels distort Marx’s manuscripts for the key chapters in Capital Volume 3 and turn Marx’s ideas into a theory of crisis that was not Marx’s?

Back in 1978, Jerrold Seigel (Marx’s Fate) had a look at the manuscripts. Yes, Engels made significant editorial changes to Marx’s writing on the law as in capital Volume 3. He divided it into three chapters 13- 15; 13 was the law; 14 was counteracting influences and 15 described the internal contradictions. But in doing so, Engels shifted some of the text into Chapter 13 on the law as such when in fact in Marx’s manuscript, they came after the counteracting factors in Chapter 14. In this way, Engels actually makes it appear that Marx balances the counter-tendencies in equal measure with the law as such, when the original order of the text re-emphasises the law AFTER talking about counter influences. So, as Seigel puts it: “Engels made Marx’s confidence in the actual operation of the profit law seem weaker than Marx’s manuscript indicates it to be.” Seigel p339 and note 26.

Also, Fred Moseley recently introduced a new translation into English of Marx’s four drafts for Volume 3 of Capital by Regina Roth, where Marx’s law of profitability is developed and showing how Engels edited those drafts for Capital (Moseley intro on Marx’s writings). Moseley shows that much maligned Engels did a solid job of interpreting Marx’s drafts and there was no real distortion. “One can, therefore, surmise that Engels’ interventions were made on the basis that he wished to make Marx’s statements appear sharper and thus more useful for contemporary political and societal debate, for instance, in the third chapter, on the tendency of the rate of profit to fall.”

And this is not surprising, as from 1870, Engels had moved from Manchester so Marx and he met together as a matter of routine, usually daily. Discussions could go on into the small hours. Marx’s house lay little more than 10 minutes walk away … and there was always the Mother Redcap or the Grafton Arms.

What MH said
Well, enough of my arguments for the law. What did Professor Heinrich say in Berlin? In his opening remarks, MH started by saying that those who put forward the law of profitability as Marx’s own are just dogmatically following every tic and comma of his writings. Marx changed his mind about lots of ideas and theories over the decades and did not have a strict position from day one. Indeed, Marx’s slogan for life was “doubt everything”. The original manuscripts that contain Marx’s law in its fullness and as edited by Engels were written very early, as early as Volume 1 of Capital, the only volume Marx himself published. And from the end of the 1860s, Marx never refers to the law of profitability in any context to do with crises. Indeed, his mathematical writings at the time show that he struggled to make sense of the law and so dropped it.

Sure, Engels met Marx nearly every day in the 1870s, but Marx was a secretive chap and never showed those old manuscripts to Engels because he no longer believed in them. They only came to light after Marx’s death and then were published as part of Volume 3. It’s not that Engels distorted Marx; it’s that this law had been discarded by Marx, just as he had first raised the idea of underconsumption as an explanation of crises and then dismissed it.

As for the logic of the law itself, sure, the two assumptions that I posed for the law may well be realistic but so is the assumption that a rising organic composition of capital will be accompanied by a rising rate of exploitation. We cannot know which will rise more and so the law is indeterminate, as Marx himself realised later. Indeed, it is perfectly possible for a rising organic composition of capital to lead to a rise in profitability, and not a fall.

Anyway, the law is not a theory of crises; after all, a falling rate of profit was recognised by the classical economists, Adam Smith and David Ricardo, but it was seen as a long-term gradual decline. not an explanation of cyclical crises.

As for the empirical evidence that I presented, MH reckoned that statistics can show anything – it all depends on where you start your time series. Then you can get any result you want. Anyway, the data used by me and others are bourgeois official data and not useful for Marxist value measures and so prove nothing.

A study of Marx’s manuscripts, as he has done, said MH, shows that Marx did not really have a crisis theory of any clear description. Indeed, it was not his intention in writing Capital. In a way, crisis theory based on Marx’s law of profitability is an invention or misinterpretation by Engels.

Summing up the debate
Comments from the floor in the debate were varied. Some supported MH in that there is no evidence of a rising organic composition of capital; indeed the opposite, as we can see by the falling value of hi-tech computers. Others supported me in arguing that we can use modern statistics to validate the law.

The debate could be summed up as one between dogmatism and doubt. The ‘dogmatic’ view is mine in that I and others who support the law as the underlying causal explanation of crises are just following words in a book slavishly because Marx wrote them. It is better to doubt all things as Marx did. We should doubt the logical and empirical validity of the law; we should doubt statistics; we should doubt that Marx stuck to every idea he ever expressed.

The other way of summing up the debate is that MH is the great ‘doubter’. We don’t know if Marx dropped the law; we don’t have any useful data to validate it and we don’t know if Engels distorted it or not. We know nothing. We don’t have a theory of crisis or a Marxist one.

Alternatives
Having trashed Marx’s law and denied that he had any theory of crisis, MH was asked if he had an alternative theory of crises. In a recent interview in Slovenia at the Institute of Labour Studies, he did offer one (https://www.youtube.com/watch?v=xLiCRnsHf7s). There MH reckoned (as I understand him) that capital accumulates blindly so that production gets out of line with consumption or demand from workers. So a ‘gap’ develops that has to be filled by credit, but this credit bubble cannot hold up things indefinitely and it eventually bursts and then production collapses. Well, this is a sort of a theory, but pretty much the same as the underconsumption (overproduction) theory that MH dismisses himself.

In Berlin, he presented another: that crises take place despite the claims of harmonious equilibrium in market economies by mainstream economics. I take this to mean the very existence of crises under capitalism is the theory or explanation.

These alternatives seem way less convincing or empirically supported than Marx’s own theory of crisis based on the law. No other theory, whether from mainstream economics or from heterodox economics, can explain recurrent and regular (every 8-10 years) crises and offer a clear objective foundation for the transience of the capitalist system. You could even argue that if Marx did drop it, he should not have changed his mind!

Professor Heinrich says he plans a reply to the various critics of his arguments when he gets time. I look forward to that contribution. In the meantime, if you want to follow the arguments in more detail, here are some of the relevant papers and articles on the subject published in the last few years.

Heinrich M. (2013), Crisis Theory, the Law of the Tendency of the Profit Rate to Fall, and Marx’s Studies in the 1870s Monthly Review, Volume 64, Issue 11, April heinrich13Roberts M.(2013), Michael Roberts and Guglielmo Carchedi on Heinrich

The argument that the cyclical nature of crises can be explained by the Law of the Tendency For the Rate of Profit to Fall, seems to suffer from a similar problem to the theory that the Universe was created by God. That is if God created the Universe who created God.

Similarly, if the cyclicality of crises is to be explained by the Law of the Tendency For The Rate of Profit To Fall, we are then simply led to ask, in that case what accounts for the Law of the Tendency for The Rate of Profit to Fall to itself be cyclical? If the Law really were the cause of crises (which it isn’t, its a consequence of them) then the cyclical nature of crises could only be explained by the rate of profit going through an identical cyclical pattern, at periods going up, and at other periods falling. That in itself seems to contradict the idea that the Law itself posits the tendency for the rate of profit to fall, as a long term, continuous process.

But, if the rate of profit itself falls in a cyclical pattern, the question then becomes what causes this cyclical nature of its rise and fall, or at least of its greater fall in some periods rather than others. But, once we identify the actual causes of that cyclical rise and fall in the rate of profit, we would have to conclude that it is these causes, which are the actual cause also then of crises, and that the fall in the rate of profit was only a subsidiary and proximate cause.

In fact, in Capital III in Chapter 15, Marx sets out the basic cause of that cyclicality, which is that at certain periods capital accumulation is intensive and labour substituting, and at others it is extensive and labour additive.

At some periods, technology changes very little, and so the basis for a falling rate of profit does not exist.

“Growth of capital, hence accumulation of capital, does not imply a fall in the rate of profit, unless it is accompanied by the aforementioned changes in the proportion of the organic constituents of capital. Now it so happens that in spite of the constant daily revolutions in the mode of production, now this and now that larger or smaller portion of the total capital continues to accumulate for certain periods on the basis of a given average proportion of those constituents, so that there is no organic change with its growth, and consequently no cause for a fall in the rate of profit. This constant expansion of capital, hence also an expansion of production, on the basis of the old method of production which goes quietly on while new methods are already being introduced at its side, is another reason, why the rate of profit does not decline as much as the total capital of society grows.”

So, the question becomes what is the driver for such periods coming to an end, and being replaced by periods when there is a burst of new technological development, so that the organic composition does rise, causing the rate of profit to fall? It is preciseley that the periods of extensive accumulation, when the conditions for the tendency for the rate of profit to fall, do not exist, causes existing labour supplies to be used up, as Marx describes in Chapter 15, which causes wages to rise and the rate of surplus value to fall pace also his description in “Value, Price and Profit” in agricultural wages, which led to capital seeking new technological solutions.

As described in Chapter 15, and in Chapter 6, and the same ideas are developed in Theories of Surplus Value, partly also in relation to sharp rises in input prices, and falling elasticity of demand, which cause a squeeze on profit margins – that has nothing to do with the Law of Falling Profits, but is caused here by sharply rising input costs that cannot be passed on in prices, and a falling rate of surplus value due to rising wages as labour supplies get used up – which are the reason that crises of overproduction such as those described in Chapter 15 erupt, because with such reduced profit margins (even if the actual annual rate of profit is high or rising, which it could be because extensive accumulation could cause the rate of turnover to rise) mean that any sudden rise in input costs, or fall in demand leads to production for each commodity so affected to become unprofitable.

Its those conditions, which require, as again described in Value, Price and Profit, and in Chapter 15, for the need for a new drive for technological development, so as to create a relative surplus population, and thereby reduce wages and raise the rate of surplus value. It is those conditions, which Marx describes as leading to the tendency for the rate of profit to fall.

In other words, the cyclical nature of crises of overproduction, arises not because of the Law of the Tendency for the Rate of Profit to Fall, but because the cyclical nature of both is determined by the same factors, in reality the factors that govern the long wave, but it is those factors, which determine that it is the outbreak of the crises of production, which are the goad to introduce new technologies, and thereby bring about a new period of intensive labour saving accumulation, not the law of falling profits, whose cyclical nature is itself otherwise inexplicable, which brings about cyclical crises of overproduction.

Nice piece. The Heinrich (and Harvey) argument lacks both analytical consistency and empirical validity. WHen it comes under scrutiny (as in the recent Izmir University of Economics 2014 seminar) it resorts to non-sensical declarations like the one fielded by D.Harvey: capitalism is always in crisis (but we cannot define its precise mechanism) and it is simply ‘moving around’ (sic!), i.e. the crisis commutes from one region to the other.

I think it’s clear you made the stronger argument MR. Indeed MH’s arguments seem to be a classical example of someone in a losing position flailing around trying to score whatever points he can to cover up the fact.

In as short a summary as can be succinctly stated: Heinrich and others (including Harvey down through to commentators like Arthur Bough ‘Boffy’ above), are within the school of logic that philosophize with scepticism (Kantianism). If one writes on Marx and his view of scientific socialism one might never forget that he co-wrote the POLITICAL-economy of the Communist Manifesto and the communist outlook before he plumbed the full depths of capitalist economy itself. I might jusifiably amend here the eleventh thesis on Feuerbach: “Philosophers (of economics and social change) have hitherto only interpreted the world in various ways; the point is to change it.” – Cyclical scepticism is just playing with words!

” “Philosophers (of economics and social change) have hitherto only interpreted the world in various ways; the point is to change it.””

I agree, which is why I don’t think Marxists should fall into a lazy approach of allowing mechanical historical forces such as the Law of the Tendency For The Rate of Profit to do the work for them. The whole concept that Capitalism necessarily falls into crises that must get ever worse, and ever more intractable – presumably resulting as Malthus and Ricardo believed in some absolute collapse of the system, as it is unable to prevent profits falling in absolute terms – is contrary to Marx’s view, specifically to his detailed refutation of such an approach as set out in Theories of Surplus Value.

But, it also seems to be driven by a desire for such a crisis, or repeated crises to do the work that Marxists themselves have no been able to achieve, of winning a majority of workers to the vision of socialism. Having failed to convince a majority of workers to the idea of a society that is superior to the one they currently live under, the approach of the catastrophists appears to be not to up their own game and try harder to present a more enticing view of the view for workers, but instead to rest all their hopes on the current system becoming intolerable or collapsing completely.

I can think of nothing further than Marx’s view of the need to not only interpret the world but to actively change it for the better.

“First, there is a limit to the rate of surplus value (24 hours in a day) and there is no limit to the expansion of the organic composition of capital.”

This point is also clearly wrong. There are only 24 hours in a day for any concrete labour, but central to Marx’s theory is that the essence of value, and the measure of value is not concrete labour but abstract labour. As any concrete labour may be complex labour, there clearly is not just 24 hours of abstract labour in a day.

As Marx makes clear, if the complex labour of say a brain surgeon is equal to 10 times the simple labour of a machine minder, then there are 240 hours of simple labour in the day of the brain surgeon compared with the 24 hours in the day of the machine minder.

Itrs for that reason Marx sets out that its possible for capital to make much more profit out of complex labour than simple labour, even if the wages paid to the complex labour is higher. A society that has more complex labour relative to simple labour, will therefore, be able to enjoy not only higher living standards but also a higher rate of profit. Marx gives the example, of the more developed society where living standards are high, but productivity means that the labour employed acts as though it were complex compared to the identical labour employed in a less developed economy, where productivity levels are lower.

Its why various countries with small population, but with disproportionally high levels of intellectual and other forms of complex labour are able to enjoy high living standards and high rates of profit.

“there is no limit to the expansion of the organic composition of capital.”

But, there are practical limits. As Marx describes, capital only introduces labour saving machinery if the machine costs less than the paid labour it replaces. But, that means that in order to introduce each new more productive machine, this machine must be ever more proportionally productive than the one before it, and/or must be ever cheaper, because as the labour-power is reduced relatively, and the value of labour-power is reduced as a consequence of the resulting rising productivity, it becomes ever more difficult for any new machine to satisfy this requirement that it requires less labour-time for its production than the paid labour-time it replaces.

But, as Marx points out, although the technical composition of capital may rise, this requirement set out above, that each new machine must be proportionately more productive, and cheaper than the ones that went before it, means that this need lead to no rise in the organic composition, because the value of the new machine is thereby significantly reduced. But, more than that, this vastly reduced value of the new machine, thereby also causes a moral depreciation of all existing machines, which thereby reduces the value of the advanced constant capital, which causes the rate of profit to rise.

Moreover, this vast increase in productivity that is logically required to meet this criteria, necessarily means that social productivity rises by such ever rising proportions too, which not only reduces the value of labour-power causing the rate of surplus value and rate of profit to rise, but also causes the value of circulating constant capital to be slashes, which again causes the rate of profit to rise.

Moreover, when Marx measures the organic composition of capital here, he does so on the basis of the advanced not the laid out capital, and this rise in productivity by significantly increasing the rate of turnover of capital, thereby significantly reduces both the advanced circulating constant capital and variable capital. That both results in a significant release of capital that can be utilised elsewhere, as Marx sets out both in Volume I, dealing with mechanisation, but also in Volume II, Chapter 20, and Volume III, Chapter 6.

Dear Boffy – you leave out the fact that there any number of political groupings and individuals who, not only renounce thoughts and suggestions, that capitalism will axiomatically fall as ‘objectifying determinists’, no, they believe their scepticism entitles them to purvey and disseminate notions that there is progressive life in the old dog of capitalism itself. Why, new economics minister Varoufakis, in Greece, and old dog Peter Taaffe, of the misnamed Socialist Party (CWI) are but two of the variants denying the central importance of the aforementioned LTFRP .. there are of course many others who play variations on that theme.

“They believe their scepticism entitles them to purvey and disseminate notions that there is progressive life in the old dog of capitalism itself.”

But clearly there is progressive life in capitalism still! I am still waiting for an answer from the proponents of the LTPRF, who claim that the rate of profit was falling in the last 30 years, of how then it was possible for their to have been such an astronomical accumulation of capital during that period, and specifically over the last 20 years or so.

Do they now have some new theory that disproves Marx’s contention that capital accumulation can only come in the vast majority from the production of surplus value? Where then did all of the capital come from that enabled a doubling of the global working-class since the 1980’s, and a 30% increasing in the global working-class in the first decade of this century? Where did the capital come from that accounted for global fixed capital formation doubling in the first decade of this century?

Moreover, as Marx describes in Capital III, capital does not arise from profits as revenue. Profits as revenue can be used in any number of ways. It is only when the money form of those profits is converted into money-capital, and used for the purchase of productive-capital that capital is accumulated. If we look at the situation over that period, not only was there this massive increase in the accumulation of productive-capital, but a large portion of profits was used as revenue, not just to finance unproductive consumption, but to finance speculation on an epic scale, witnessed by the 1300% increase in the Dow Jones between 1980-2000, the blowing up of massive bubbles in global bond and property markets etc.

Capitalism no doubt continues to develop the productive forces on a massive scale – 25% of all the goods and services produced in Man’s entire history were produced just in the first decade of this century. We see technological developments in abundance, such as the developments in gene technology, and bio-sciences, that have themselves been made possible by the leaps forward in computer technology.

There is little point in comparing the limitations of capitalism with a so far non-existent socialism, and within its own terms it continues to act as a progressive force, in terms of developing the productive forces.

“It goes from falling profitability to falling profits to falling investment to falling employment and incomes. A bottom is reached when there is sufficient destruction of capital values (writing off plant and equipment, bankruptcy of companies, reduction in wage costs) to raise profits and then profitability. Thus there is a cycle of boom and slump driven by the law of motion of profitability.”

I agree with this causality, but it cannot be justified on the basis of the Law of Falling Profits, and Marx’s description of crises in Chapter 15.

The period of boom, which causes labour supplies to be used up, and wages to rise (and often causes sudden spikes in input prices as set out in Capital II, and in III Chapter 6) and thereby causes profits to fall does so not on the basis of the law of falling profits caused by an acceleration in the accumulation of more technologically developed means of production, but on the basis of a more extensive accumulation of the existing forms of technology.

“Growth of capital, hence accumulation of capital, does not imply a fall in the rate of profit, unless it is accompanied by the aforementioned changes in the proportion of the organic constituents of capital. Now it so happens that in spite of the constant daily revolutions in the mode of production, now this and now that larger or smaller portion of the total capital continues to accumulate for certain periods on the basis of a given average proportion of those constituents, so that there is no organic change with its growth, and consequently no cause for a fall in the rate of profit. This constant expansion of capital, hence also an expansion of production, on the basis of the old method of production which goes quietly on while new methods are already being introduced at its side, is another reason, why the rate of profit does not decline as much as the total capital of society grows.”

The crisis arises not because of the Law of falling profits, but because with no rise in productivity caused by this existing technology, the accumulation of capital simply uses up more of the existing labour supply, and supply of raw materials.

“As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.”

Its precisely to address this squeeze on profits that capital is led to engage in a new innovation cycle to develop new technologies to replace labour, and which when they are introduced creates the conditions of rising social productivity required for the operation of the Law of falling profits. In other words, it is a consequence not a cause of crises.

Marx emphasises this role of rising wages and a fall in he rate of exploitation as the cause of such crises of overproduction by writing,

“Over-production of capital is never anything more than over-production of means of production — of means of labour and necessities of life — which may serve as capital, i.e., may serve to exploit labour at a given degree of exploitation; a fall in the intensity of exploitation below a certain point, however, calls forth disturbances, and stoppages in the capitalist production process, crises, and destruction of capital.”

It is precisely to deal with this problem that it is the “degree of exploitation” that needs to be addressed, which leads to the need to introduce labour-saving technology. By contrast, Marx says that the Law of Falling Profits is marked and a result not of a reduction in the rate of exploitation, but a RISE in the rate of exploitation, a rise in productivity.

As he says,

“Given the necessary means of production, i.e. , a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e. , the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given.”

The need to develop new technologies and introduce labour saving equipment flows from that, and its in this context that Marx describes the Law of falling profits as one of the means, alongside depreciation of existing capital, of resolving the crises.

Not all falls in the rate of profit are a consequence of the Law of falling profits. Those associated with crises of overproduction, stem from the conditions that create that overproduction, i.e. a fairly stagnant level of productivity, and the using up of labour and raw materials, along with falling elasticity of demand resulting from high levels of employment and incomes satisfying a greater degree of consumption needs.

Falls in the rate of profit resulting from the Law requires on the contrary that social productivity be rising, and that rising social productivity is a consequence of periods of innovation, which are themselves caused by falling levels of exploitation, and squeezed profits.

As a Marx says, it is the Law of Falling profits that is one of the means of resolving crises not the cause of them.

“The specific feature about it is that it uses the existing value of capital as a means of increasing this value to the utmost. The methods by which it accomplishes this include the fall of the rate of profit, depreciation of existing capital, and development of the productive forces of labour at the expense of already created productive forces.”

“while there is no evidence that investment can explain any movement in profits.”

If that’s true it would seem to sound the death knell for Marx’s Law of The Tendency For The Rate of Profit To Fall, because it is based on the proposition that labour saving technology forms the basis of a wave of investment that causes social productivity to rise, which causes the organic composition of capital to rise, and thereby causes the rate of profit to fall!

In Maito’s chart of the global rate of profit the rate of profit has never at any point risen above the rate of profit in 1869. So, if it is this lower rate of profit that causes crises, then capitalism should have been in continuous crisis since then. It hasn’t been, but according to Maito, the rate of turnover of capital in the 19th century was only 1.5, whereas according to Engels it was as high as 8.5 in 1871!

” pre-tax profits can explain 44 percent of all movement in investment”

That doesn’t seem to be born out by Maito’s chart of global profit rates either. According to Maito’s chart, the rate of profit falls from 1869 through to around 1914. But, on the basis of the argument proposed here, that should have meant that investment continued to fall during this period.

In fact, the period from around 1890 until 1914 was a period of long wave boom, during which capital accumulated on a massive scale globally, and provided the basis not just for a massive expansion at that time of the working class, but of labour movements like the Second International based upon it!

According to Maito’s chart the rate of profit shot up sharply after 1914, and remained at a similar level until 1929. Once again on the basis of the argument presented here, this sharp rise in the rate of profit should have caused a surge in investment.

In fact, the long wave boom that ended in 1914, saw some uptick as a result of the first world war, but that quickly ended with the crisis of 1921, and far from there being increased investment on the back of this sharply higher rate of profit, there followed a period of intense stagnation through the 1920’s.

The reason the Law of The Tendency For The Rate of profit To Fall is important to Marx’s theory has nothing to do with crises. That is why in Theories of Surplus Value, where Marx actually does spell out his theory of crisis in contradistinction to the crisis theories of Ricardo and Malthus – who Marx says could not have a theory of crises of overproduction, because in the case of Ricardo he had never seen them, as the first only arose in 1825 – Marx does not refer to the Law even once!

The reason it is important to Marx’s theory is quite simple, without it there can be no explanation of the Transformation Problem. It is the Law of falling profits, which explains why those capitals employed in spheres where the organic composition of capital is high have low rates of profit, and those in areas where the organic composition of capital is low have high rates of profit.

It, therefore, explains why capital moves away from the former causing supply of those commodities to fall, and their market prices to rise, and into the latter, causing the supply of commodities in those sectors to rise, and their market prices to fall, thereby bringing about an average and equalised rate of profit, and prices of production.

It is the explanation of how values are transformed into prices of production, and how the average rate of profit is established that is the most important aspect of Marx’s work in this regard, and why he saw the Law of Falling profits as important, not any idea that it was the cause of crises of overproduction!

Obviously the empirical data that shows a long term decline in the rate of profit. Can you also by the way refute that the organic composition of capital has risen long term in relation to variable capital? Your last post pretty much proves the point actually, capital flows from one sector of the economy to the next, over time developing the organic composition everywhere. Even the Chinese sweat shops turn to automation and so on.

Firstly, I do not have to refute a long term decline in the rate of profit, because my argument is about whether there is anything in Marx’s theory about whether such a trend has anything to do with the cause of crises of overproduction. If as I contend, along with the majority of other Marxists that it doesn’t, then whether there has in fact been any such trend is irrelevant. Given that Marx’s description of crises of overproduction in Capital III, Chapter 15, and his other descriptions of crises, for example, in Chapter 6, and his discussions of financial crises, are not about the Law of Falling profits, but about profit squeezes caused by extensive rather than intensive accumulation, given that in those places he talks about the falling rate of profit, and the moral depreciation of capital that goes along with it as a consequence of such intensive accumulation, and given that where Marx extensively sets out his actual theory of crisis in Theories of Surplus Value, he does not mention the Law of Falling Profits even once would suggest that this contention is fully justified, and proved.

In fact, in Theories of Surplus Value, where Marx does set out his theory of crisis, he does so, by setting out his criticism of Malthus and Ricardo’s theory of crisis, who did see crises, and in fact the potential for a collapse of the system, arising from such a tendency for the rate of profit to fall. That Marx spends so much time, around 50 pages, attacking such a view I think tells you all you need to know about Marx’s opinion about the role of the Law of Falling Profits in relation to crises!

Secondly, As I have set out above, even if you were to accept the empirical data that has been presented, it does not justify the claim that it is the Law of Falling Profits that causes crises. Quite the contrary, as I point out above, the 1950’s was a period of boom and rising rates of profit, and yet it suffered several cyclical crises. The 1957, in its initial manifestation was similar to the crisis of the early 1930’s, and was only curtailed as a result of Keynesian fiscal intervention. Maito’s data shows a falling rate of profit from 1869 through to 1914, and yet the period between 1890-1914 was a period of long wave boom, with massive investment and growth. The rate of profit on his graph is shown as rising sharply ahead of the actual stagnation that continued throughout the 1920’s, and so on.

Thirdly, I can’t prove that there isn’t a big yellow teapot orbiting the Sun, but observation of other factors, and logic tells me that its pretty unlikely that there is. Likewise I cannot prove that the data provided about the long term trend in the rate of profit is wrong, but I can indicate that the conclusions drawn about it do not fit with other observed data, such as the massive accumulation of capital and so on.

Fourthly, as Marx and Engels pointed out, not only individual capitalists, but the capitalist state themselves are unaware of the actual value relations that underpin the functioning of capital, and the data they keep are not in any sense organised so as to facilitate a Marxist analysis of that data. So, for example, it is in reality pretty impossible to obtain any kind of meaningfully accurate estimate of the rate of profit, because its impossible as Engels states even for individual capitalists to know how much their advanced capital is, and without such data, its impossible to calculate a Marxist rate of profit.

The existing data, for example, operate on the base of the Smithian notion, destroyed by Marx, that National Income and National Output are the same, and that the value of all output is resolved into wages, profits, rent, interest and taxes. As Marx shows this is an absurdity put forward by Smith, but which all orthodox economics including Keynes has followed since. But, if you calculate a rate of profit on the basis of this income data (v + s) rather than output data (c + v + s), you will necessarily end up with a rate of surplus value not a rate of profit.

Those that have tried to address this problem by referring to intermediate goods, do not seem to have understood Marx’s criticism of Smith that it is precisely these intermediate goods that Smith was referring to as his explanation that the value of c in (c + v + s) is itself resolved into (v+s), an absurdity that Marx explodes in Capital Volume II, in Volume III, and in Theories of Surplus Value, such did he see the importance of refuting this nonsense.

Finally, the data as presented does not account for the fact of the rise in the rate of turnover of capital. The fact is that you cannot argue that the rate of profit was falling due to rising productivity, which is the basis of Marx’s Law, without simultaneously accepting that the rate of turnover rises by at least a similar proportion, which then more than offsets the fall in the rate of profit, so that although the rate of profit p/k may be falling, the annual rate of profit s x n/C is rising.

Simply using the average annual rise in productivity since the 1950’s as a proxy for the rise in the rate of turnover gives an annual rate of profit today three times higher today than any current measure of p/k provides, and all measures that would give a higher annual rate of profit today than in the 1950’s.

To his credit Estoban Maito has attempted to provide an estimate of an annual rate of profit based upon changes in the rate of turnover. However, as I have set out elsewhere I think his methodology is seriously flawed, and so leads to false conclusions. One of the most obvious manifestations of that is that on the basis of his data and methodology he derives a rate of turnover of 1.5 at a time when according to Engels himself (Capital III, Chapter 4) the actual rate was around 8.5.

I take Maito’s point that it is the degree of change not the absolute level that counts, but if the methodology leads to such a faulty conclusion about the rate of turnover for a period when we have a fairly accurate estimate of what it was, I think it seriously calls into question the data and methodology itself, not to mention for the other reasons I have set out in my response to his paper.

“Your last post pretty much proves the point actually, capital flows from one sector of the economy to the next, over time developing the organic composition everywhere. Even the Chinese sweat shops turn to automation and so on.”

Indeed, a serious flaw of the argument put forward about the LTPRF, is that a law that undoubtedly applies to individual capitals has no reason to apply to capital in general. You can only deduce a falling rate of profit for capital in general, if you assume no change in the actual composition of the social capital itself over time.

In other words, you can only deduce a falling rate of profit, if you assume that capital keeps accumulating in the same spheres of production, and does so on the basis of an ever rising level of productivity, which is the fundamental requirement, though not a sufficient condition, for a rising organic composition.

But, the whole point is that capital does not simply keep accumulating in the same spheres of production. The reason that the Physiocrats believed that it was only agricultural production that created surplus value, was that, as Marx describes, a condition for labour and capital being employed in any other sphere, is that first a surplus in agriculture must be produced, so that labour and capital can be released from it, so as to be used elsewhere.

But, the whole point about why there has been such a vast increase in productivity, and no increase in unemployment, is that capital released from one sphere, either as a result of a direct release of capital due to a fall in the value of capital, or a rise in the rate of turnover of capital, or simply due to a rise in the rate or mass of capital, is that this capital gets invested in other new spheres of production, with usually very low organic compositions, and high rates of profit.

It is the very fact that capital then accumulates in these new low organic composition spheres, relative to the old high organic spheres that means that the higher rate of profit in these new spheres of production, pull up the average rate of profit itself, as they have an increasing impact on the economy, and the old spheres have a declining effect.

In fact, Marx writes, that this factor alone irrespective of the other countervailing factors, and irrespective of the fact that this is only the rate of profit p/k, and not the annual rate of profit s x n/C, is sufficient to nullify the tendency for the rate of profit to fall.

“These new lines start out predominantly with living labour, and by degrees pass through the same evolution as the other lines of production. In either case the variable capital makes up a considerable portion of the total capital and wages are below the average, so that both the rate and mass of surplus-value in these lines of production are unusually high. Since the general rate of profit is formed by levelling the rates of profit in the individual branches of production, however, the same factor which brings about the tendency in the rate of profit to fall, again produces a counterbalance to this tendency and more or less paralyses its effects.”

I wonder if it could be more appropriate to consider things in terms of the Rate of Surplus Value, relative to the Circuit of Capital

C (LP + MP) — M… P… C‘ — M (M+m)

If we can portray a breakage to the Circuit in the Productive Sphere, relative of course to Surplus Value appropriation. (Whether this be through a stage of instensified use of fixed capital in production, labour shortages in some industries and surpluses in others, or indeed a lack of productive work. An unemployment of labour power in either case)

With an analysis grounded in surplus value, rather than a historically predetermined trajectory in the forces of production or indeed profitability. We can begin to pinpoint the growth of ficticious capital as a means to ensuring the Circuits continued metamorphasis.

Whether that be in creating financialised commodities (not from a “bank” centric perspective but from a perspective that relates to all who benefit from the access to finance in such a respect, whether that be productive capital or indeed “rentier” esque interests) to be converted into money capital or indeed by facilitating such a process through the expansion of liquidity, from a monetary policy perspective.

Interested to hear youre response to what is only a sketched out inference, with a few equally sketchy examples on my behalf.

“CORPORATE profits are at their highest level in at least 85 years. Employee compensation is at the lowest level in 65 years.

“The Commerce Department last week estimated that corporations earned $2.1 trillion during 2013, and paid $419 billion in corporate taxes. The after-tax profit of $1.7 trillion amounted to 10 percent of gross domestic product during the year, the first full year it has been that high. In 2012, it was 9.7 percent, itself a record.”

The New York Times, April 4, 2014

Not much of a “law” if its “mitigating factors” can produce results like these. Corporate profits are at an all-time high. Cash-hoarding by non-financial corporations rises and rises. And even by official standards, capacity utilization shows an overall mild downward trend.

Luis, I think that is important to point out that the value of a dollar is not constant. So a simple nominal variable not necessary implies what it apparently seems.
In this respect, we have the monetary expression of labor time as a tool. During one year, we need to divide net value added by the total hours worked. If in one year we have 10 hours worked wich are expressed in 10 dollars, and next year we have 10 hours worked expressed in 20 dollars, we have indeed the same value, not the double value produced. It just occured a duplication of the monetary expression of labour time, from 1 dollar per hour to 2 dollars per hour.
This said, there is nothing strange in an increasing mass of profits related to Marx theory or his particular theory of the tendency of the rate of profit to fall. Indeed the increase in the mass of surplus value is included as a more or less permanent fact for the long run. I found meaningless to say that the profits today are the highest in 85 years because the profits of the majority of those years has to be larger that those profits of that n-85 year.
Related to US, the mass of profits, AS VALUE (applying the MELT and not just taking the nominal amounts), considering both corporate profits or a broader measure, dropped mainly in 2007 and 2008, with important recoveries mostly in 2010, 2012 and 2013 (the latter being the weakest recover of this three years). But it was just in 2013 that the value of profits surpassed its prior peak of 2006.
On the other hand, at least until 2013, the total hours worked didn´t surpassed the peak of 2007, so the increase in surplus value rate has a relevant influence in that new peak in the value of profits.

But Boffy capital does keep accumulating in the high organic sectors. Just look at fossil fuels, not only is there an ever increasing investment there, including ever riskier attempts to draw up oil from the deep sea in the arctic regions, also it’s a massively subsidised operation. It has just come out that 6 trillion dollars goes in to the fossil fuel sector globally in subsidy form, not including military spending.

The other point here is that the mature an industry, and so the higher its organic composition of capital already, the much more difficult it becomes to accumulate capital within it intensively for the reasons I have set out above, i.e. as Marx says new machines are only introduced if they cost less than the paid labour they replace. If the organic composition of capital is already very high, then a lot of labour has already been replaced, any new machines must be incredibly more productive, or else incredibly cheap compared with existing machines.

That is why increasingly in these industries, accumulation takes place on an extensive rather than intensive basis. That means that more machines of the same type are employed, and so there is no change in productivity. But, as Marx makes clear its only when intensive rather than extensive accumulation occurs that any rise in the organic composition of capital takes place.

If I employ 2 machines of the same kind rather than 1, I have to employ double the amount of labour-power and double the amount of materials too, so no change in the organic composition of capital arises, and so no basis for the Law of Falling profits.

In fact, because employing two machines of the same kind rather than 1 means that the quantity of output required for a given working period is produced in half the time, this means that the rate of turnover of this capital doubles, which means a doubling of the annual rate of profit on that capital.

In the March issue of the Review of Radical Political Economy, I argue that the materialized composition of capital c/(v+s) is preferable to c/v in approaching any falling tendency of the rate of profit. Anwar Shaikh named it, but the concept itself predates his phrasing. This concept permits a distinction between the contribution of technology versus changes in s/v in assessing changing rates of profit.

For a half century in the U.S., c/(v+s) is estimated to be virtually unchanged at a level of two.

Related to Paul´s comment, in the new draft of my paper I added some facts from my estimates, in particular the average and weighted average of the rate of profit in core countries since 1885, including P/K, but also Y/K and P/Y just to reflect that ROP not only felt due to an increase in composition (expressed in the decrease of Y/K). As P/Y also felt in the long run (leaving aside some recovery during last decades), the latter deepens the fall implied in Y/K.

“As Marx makes clear, if the complex labour of say a brain surgeon is equal to 10 times the simple labour of a machine minder, then there are 240 hours of simple labour in the day of the brain surgeon compared with the 24 hours in the day of the machine minder.”

I think Marx also made it clear that the vast majority of workers do not fall under the complex labour category.

“The reason it is important to Marx’s theory is quite simple, without it there can be no explanation of the Transformation Problem.”

Engels said it like this, those who want to do away with the market should explain how resources are to be allocated (a response to Proudhonism I think).

“The argument that the cyclical nature of crises can be explained by the Law of the Tendency For the Rate of Profit to Fall, seems to suffer from a similar problem to the theory that the Universe was created by God. That is if God created the Universe who created God.”

You could equally apply this to what came before the big bang but alas we are here and debating. So the mystery continues…

Actually, Marx doesn’t say that the vast majority of workers do not fall under the category of complex labour. He says that capital tends to deskill labour, but he also says that capital tends to create new types of skilled labour. But, the issue of whether labour is skilled or unskilled is not the same as whether labour is complex or simple. As Marx says, the determination of whether labour is complex or simple is solely made post facto in the market on the basis of what consumers are prepared to pay for the product of that labour.

Moreover, Marx introduces the concept that any labour that uses a new machine or more productive method itself operates as though it were complex labour compared to those labours that continue to work with previous forms of technology. He also says that a modification of the Law of Value is required when looking at the productivity of labour on an international scale, so that labour in countries with higher levels of social development appears as complex labour, compared with labour in less developed economies.

But, in any case what that proportion is is irrelevant. The fact remains that the fact that there are only 24 hours of concrete labour in a day cannot be a limitation on the expansion the potential for the rate of surplus value to continue to expand during the day, because value creation is a function of abstract labour and not concrete labour. If as part of the development of social productivity – which is what causes the rising organic composition of capital, and tendency for falling profits – the proportion of complex labour in an economy rises, so does the potential for rising rates of surplus value.

I don’t see what Engels’ quote about doing away with the market has to do with anything, being discussed, let alone that the real importance of the law of falling profits on the basis of rising organic compositions of capital is that without it you can’t explain the average rate of profit or prices of production!

Yes, the argument about what came before God could be applied to what existed before the Big Bang, which is why physicists and cosmologists have tried to answer that question! The fact remains that if you want to explain the cyclicality of crises by the falling rate of profit, you then have to show that the rate of profit also moves in cycles, and explain why those cycles occur on a regular basis.

There is nothing in the Law of Falling Profits that allows such an explanation, because Marx demonstrates that the Law only operates over very long time periods, and that there are lots of influences on it during those periods. Moreover, for it to be a cause of cyclical crises it would have to be shown that its manifestation causes behavioural changes – for example, that capital could actually see that the rate of profit had risen, thereby encouraging them to invest more. But, precisely because the law only operates over such a long period and is not particularly visible in its effect on profits, its hard to see how this then causes the required behavioural response.

There is an explanation as to why the rate of profit moves in cycles, and it comes down to Marx’s analysis that the rate of profit is a function of the value of commodities. Surplus value is the difference between the value of one commodity – labour-power (and so the commodities also required for its reproduction) and the value of the commodities produced by that labour-power. Movements up and down, or the pace of movements up in surplus value are then a function of changes in these values.

For these to move in cycles requires that there is a mechanism that drives periods of slower or more rapid change in productivity. That mechanism is not provided by the law of falling profits. Rather the movements in the rate of profit, as set out above are a function of this mechanism, as well as the movements in productivity and commodity values. That mechanism is the long wave.

It is then necessary to explain why this long wave exists, and how this mechanism operates, i.e. what causes productivity to move in such cycles. Mar himself describes some of the features of that. For example, he sets out the average life of fixed capital, and he was himself looking into the duration of the larger forms of fixed capital, such as the construction of factories, as a cause of longer term cycles. But, as Marx sets out, particularly in Capital III, Chapter 6, different types of capital accumulation also create this cyclicality.

Labour shortages, result from the fact that for long periods capital accumulation takes place on an extensive rather than intensive basis. That is existing base technologies embedded in different types of machine simply get rolled out on a larger scale. Existing companies simply add to the stock of their existing machines and consequently employ additional labour and circulating constant capital in the same proportion. productivity does not rise, and nor does the organic composition of capital. Existing stocks of labour and materials start to get used up, and shortages in particular areas arise causing a squeeze on profits.

“All this, and the spirit of capitalist production in general, may be very well studied in the cotton shortage of 1861-65, further characterised as it was by the fact that a raw material, one of the principal elements of reproduction, was for a time entirely unavailable. To be sure, the price may also rise in the event of an abundant supply, provided the conditions for this abundance are more knotty. Or, there may be an actual shortage of raw material. It was this last situation which originally prevailed in the cotton crisis.”

As Marx sets out, in the case of raw materials, this causes new sources to be opened up, and for materials to be shipped from ever greater distances, for example Indian cotton to replace US cotton supplies. But, establishing new farms, new mines and so on, to provide this additional supply to deal with these shortages does not happen overnight.

Marx sets out in Chapter 15 and elsewhere, the using up of labour supplies so that the rate of surplus value falls, as wages rise. It is this using up of supplies, and rise in the price of inputs that causes a squeeze of profit margins – even as the annual rate of profit may still rise, encouraging further extensive accumulation – which means that any sharp spike in prices, or drop in demand means that the capital consumed cannot be reproduced, and a crisis erupts.

“The greater the development of capitalist production, and, consequently, the greater the means of suddenly and permanently increasing that portion of constant capital consisting of machinery, etc., and the more rapid the accumulation (particularly in times of prosperity), so much greater the relative over-production of machinery and other fixed capital, so much more frequent the relative under-production of vegetable and animal raw materials, and so much more pronounced the previously described rise of their prices and the attendant reaction. And so much more frequent are the convulsions caused as they are by the violent price fluctuations of one of the main elements in the process of reproduction.”

This is not a crisis of overproduction caused by the law of falling profits, but a crisis caused by more extensive capital accumulation, which causes supplies of inputs to be used up, causing a profits squeeze, which results in these sudden shocks when reproduction breaks down.

It is to overcome these shortages of materials and labour that capital launches into a search for new technologies so that raw materials can be used more efficiently to reduce waste – look at the way there was a rush to develop new technologies after the 1980’s oil shocks, which resulted in a massive improvement in the efficiency of oil use – but also as marx sets out in relation to the rise of agricultural wages to develop labour saving technology.

Once again, this cannot be developed immediately. It proceeds first by the development of new base technologies. Then these base technologies are incorporated into a wider range of machines, and then consumer products. For example, microchips were used to develop labour saving machines in the 1980’s, and now are incorporated into a huge range of consumer products.

These labour saving technologies are rolled out intensively, and it is the role they play in raising productivity, and consequently the organic composition of capital, which leads to the operation of the law of falling profits. Its for that reason that Marx says that the law is one of the means – along with the depreciation of existing capital, which is also a consequence of this rise in productivity – which is one of the methods by which capital resolves such crises of overproduction caused by these shortages.

Incidentally, this is another important point in relation to the issue raised by Simon about investments in oil production. The mechanism for the tendency for falling profits, as described by Marx is that these new labour saving technologies raise social productivity so that a greater proportion of circulating constant capital is processed. There is a general misconception that it is the rise in the amount of fixed capital, that represents the rise in the organic composition. This is specifically refuted by Marx, who says that the proportion of fixed capital, as well as the proportion of labour in the value of the commodity steadily declines, whilst the proportion of raw material rises, as a direct consequence of the rise in productivity.

“The value of raw material, therefore, forms an ever-growing component of the value of the commodity-product in proportion to the development of the productivity of labour, not only because it passes wholly into this latter value, but also because in every aliquot part of the aggregate product the portion representing depreciation of machinery and the portion formed by the newly added labour — both continually decrease. Owing to this falling tendency, the other portion of the value representing raw material increases proportionally, unless this increase is counterbalanced by a proportionate decrease in the value of the raw material arising from the growing productivity of the labour employed in its own production.”

But, as Marx also says, this can only apply in those industries which actually process such raw material. But, as he sets out, industries like oil production – or any other extractive or primary products production – does not process such raw material. Consequently, the increase in technology, which raises productivity cannot on Marx’s basis, cause a rising organic composition, or at least not to the extent as in other industries, because the rise in productivity does not cause a consequent rise in the quantity of circulating constant capital, which in these industries exists only as auxiliary materials.

The fact, that Marx sets out that machines are only introduced to replace labour where there cost is less than the paid labour it replaces sets an immediate limit on any increase in the organic composition, because it means that any increase in the quantity of fixed capital employed, must be compensated by the fall in the value of that fixed capital, so that in fact the value of fixed capital here must fall relative to the value of variable capital.

A production system based on profit has resulted in the overuse of antibiotics to the point where they seriously threaten the future development of mankind. This is just one example of what Harvey calls the insanity of the capitalist system.

I think the main point about the falling rate of profit is how this system pushes the needs of mankind aside in a blind search for gain.

But the theory of historical materialism is not to be found in economic determinism but class struggle. It was Marx and Engels belief that workers would be compelled to overthrow the system that formed the basis of their scientific socialism and not the derivative but important economic theory of falling profits.

I think Marx and Engels would say that its necessary not to have a one sided approach, which was the problem with the Sismondists and other Economic Romanticists that followed, such as the Narodniks. Capitalism is contradictory.

So, for example, I think that M & E would agree with you about the drive for profit (not anything to do with the law of falling profits by the way) leads to the type of thing you cite in relation to the overuse of antibiotics, but they would simultaneously say that the same drive for profit had led capital to develop antibiotics in the first place, and will no doubt develop the replacement for antibiotics in the future.

Repeated crises, and a recognition by workers that their problems cannot be resolved simply by economic struggles, M&E anticipated would lead them to see the need to escape wage slavery by developing their own worker owned property, as Marx puts it in Value, price and Profit,

“At the same time, and quite apart from the general servitude involved in the wages system, the working class ought not to exaggerate to themselves the ultimate working of these everyday struggles. They ought not to forget that they are fighting with effects, but not with the causes of those effects; that they are retarding the downward movement, but not changing its direction; that they are applying palliatives, not curing the malady. They ought, therefore, not to be exclusively absorbed in these unavoidable guerilla fights incessantly springing up from the never ceasing encroachments of capital or changes of the market. They ought to understand that, with all the miseries it imposes upon them, the present system simultaneously engenders the material conditions and the social forms necessary for an economical reconstruction of society.”

In other words, as Marx sets out in Capital III, capital itself drives towards an abolition of private capital and its replacement by socialised capital in the form of the joint stock company and the worker owned co-operative, and credit provides a basis for workers to extend the worker owned co-operatives across the economy, provided they do so via a co-operative federation that acts to prevent them being broken up and reconverted into individual capitals.

“The credit system is not only the principal basis for the gradual transformation of capitalist private enterprises into capitalist stock companies, but equally offers the means for the gradual extension of co-operative enterprises on a more or less national scale. The capitalist stock companies, as much as the co-operative factories, should be considered as transitional forms from the capitalist mode of production to the associated one, with the only distinction that the antagonism is resolved negatively in the one and positively in the other.”

Its on this basis that workers not only develop the property forms and mode of production of the future, which thereby demonstrates its superiority and right to replace the existing system, but increasingly demonstrates that fact in practice to workers, showing them why they have an incentive to extend that worker owned property, but the resistance of capital to its extension also demonstrates to them why they have to engage in a political struggle as well as an industrial, and ideological struggle to achieve it.

“But there was in store a still greater victory of the political economy of labor over the political economy of property. We speak of the co-operative movement, especially the co-operative factories raised by the unassisted efforts of a few bold “hands”. The value of these great social experiments cannot be overrated. By deed instead of by argument, they have shown that production on a large scale, and in accord with the behests of modern science, may be carried on without the existence of a class of masters employing a class of hands; that to bear fruit, the means of labor need not be monopolized as a means of dominion over, and of extortion against, the laboring man himself; and that, like slave labor, like serf labor, hired labor is but a transitory and inferior form, destined to disappear before associated labor plying its toil with a willing hand, a ready mind, and a joyous heart. In England, the seeds of the co-operative system were sown by Robert Owen; the workingmen’s experiments tried on the Continent were, in fact, the practical upshot of the theories, not invented, but loudly proclaimed, in 1848…

Yet the lords of the land and the lords of capital will always use their political privileges for the defense and perpetuation of their economic monopolies. So far from promoting, they will continue to lay every possible impediment in the way of the emancipation of labor… To conquer political power has, therefore, become the great duty of the working classes. They seem to have comprehended this, for in England, Germany, Italy, and France, there have taken place simultaneous revivals, and simultaneous efforts are being made at the political organization of the workingmen’s party.”

The struggle for Socialism, as marx and Engels set out has to be conducted on the basis of using the advantages and developments that capitalism provides us, standing on its shoulders to create a better tomorrow, not on some nihilistic, pessimistic and ultimately reactionary focus just on the limitations of capitalism, and a hope that it will collapse.

I’ve been away for awhile, and I’m sorry I didn’t respond sooner to El Boffy’s channeling of Phil Spector’s “Wall of Sound” into walls of text…. but better late than never:

Boffy: “The argument that the cyclical nature of crises can be explained by the Law of the Tendency For the Rate of Profit to Fall, seems to suffer from a similar problem to the theory that the Universe was created by God. That is if God created the Universe who created God.

Similarly, if the cyclicality of crises is to be explained by the Law of the Tendency For The Rate of Profit To Fall, we are then simply led to ask, in that case what accounts for the Law of the Tendency for The Rate of Profit to Fall to itself be cyclical? If the Law really were the cause of crises (which it isn’t, its a consequence of them) then the cyclical nature of crises could only be explained by the rate of profit going through an identical cyclical pattern, at periods going up, and at other periods falling. That in itself seems to contradict the idea that the Law itself posits the tendency for the rate of profit to fall, as a long term, continuous process.

But, if the rate of profit itself falls in a cyclical pattern, the question then becomes what causes this cyclical nature of its rise and fall, or at least of its greater fall in some periods rather than others. But, once we identify the actual causes of that cyclical rise and fall in the rate of profit, we would have to conclude that it is these causes, which are the actual cause also then of crises, and that the fall in the rate of profit was only a subsidiary and proximate cause.”
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All Boffy has said here is that the rate of profit is a manifestation of the conflict, the antagonism, at the core of capital, that is in fact capital’s oppositional identity; the conflict between labor and the condition of labor—that is to say labor that is constituted socially as value, to be exchanged on the condition that it expands the previously existing value that was embodied in the means of production constituted as private property.

Absolutely agree, offsetting the fall in the rate of profit does not eliminate the conflict. It reproduces it, thus creating the cyclical nature, like the cycle between latency and manifestation, suppressed and expressed.

Labor constituted as value; labor power expressed as wage-labor; the relation between wage-labor and the instruments of production, both qualitatively and quantitatively, is the cause of….everything capitalist.
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Boffy: “Its those conditions, which require, as again described in Value, Price and Profit, and in Chapter 15, for the need for a new drive for technological development, so as to create a relative surplus population, and thereby reduce wages and raise the rate of surplus value. It is those conditions, which Marx describes as leading to the tendency for the rate of profit to fall.

In other words, the cyclical nature of crises of overproduction, arises not because of the Law of the Tendency for the Rate of Profit to Fall, but because the cyclical nature of both is determined by the same factors, in reality the factors that govern the long wave, but it is those factors, which determine that it is the outbreak of the crises of production, which are the goad to introduce new technologies, and thereby bring about a new period of intensive labour saving accumulation, not the law of falling profits, whose cyclical nature is itself otherwise inexplicable, which brings about cyclical crises of overproduction.”
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So what are those factors, and do they act independently of profit? These factors must determine profit—“because the cyclical nature of both is determined by the same factors, in reality the factors that govern the long wave, but it is those factors, which determine that it is the outbreak of the crises of production” — so can we have an identification of those factors and how they have been manifested in the US? It must be wages. Previously Boffy claims that the US was in a long wave downturn 1974-1999, so was that a period of overproduction? For 25 years? And of higher wages? For 25 years? Of declining profitability throughout the 25 year period, with a “new upturn” in investment, productivity, profitability beginning in 2000? Did a a new wage peak bring about the decline in profitability in 2007? The US economy in the period 1970-2015 does not conform to what Boffy believes is the trend or cycle that he proposes as a “model.”

What we do see in the US economy is a downturn in the rate of profit after 1970; attempts to restore profitability through devaluation of capital, dismantling of capital, reduced rates of growth; reduced rates of capital expenditure structurally (which does not exclude cyclical fluctuations, and cyclical periods of “growth” and “contraction”);attacks on wages– without a new peak in the rate of profit being achieved throughout the 80s and early 90s.

And then post 1992 we find massive increases in capital expenditures, in the application of “command and control” technologies to production, with increased profitability, as greater surplus value is extracted, with profits peaking around 1997-1998, without however the rate of profit exceeding the 1970 level. And then we’re on the downside again– except investment doesn’t really contract.

We get a 2001-2003, which works to push wages off their 2000 high. We get draconian controls on capital spending, so much so that the rate of replacement of fixed capital industry falls below 1, and the rate of profit recovers– but not totally to where it was before, and then..and then in 2006, capital expenditures start to expand; and wages start to increase (but not to where they were in 2000) and we wind up in the recession that begins in the 4Q 2007.

The point, besides the one that the real economy does not conform to Boffy’s long wave theory, is that capital accumulation and overproduction are driven by the same factor– profitability.
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Boffy: “But clearly there is progressive life in capitalism still! I am still waiting for an answer from the proponents of the LTPRF, who claim that the rate of profit was falling in the last 30 years, of how then it was possible for their to have been such an astronomical accumulation of capital during that period, and specifically over the last 20 years or so.”
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Priceless, since Marx’s analysis stipulates that these two, declining rates of profit and increased accumulation are conjoined twins. Each exists in the other. It’s precisely because capital has accumulated during this period that the recovery in the rate has been problematic.
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Boffy: “Do they now have some new theory that disproves Marx’s contention that capital accumulation can only come in the vast majority from the production of surplus value? Where then did all of the capital come from that enabled a doubling of the global working-class since the 1980’s, and a 30% increasing in the global working-class in the first decade of this century? Where did the capital come from that accounted for global fixed capital formation doubling in the first decade of this century?”
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It came from the intensified exploitation of labor. The intensive exploitation, the increased productivity of labor, provides the capital for the extension of the mode of production. That’s the source of Foreign Direct Investment—the explanation for Boffy’s miraculous capitalism where fishes and loaves are washed up by the all powerful “long wave.”
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Boffy: “The crisis arises not because of the Law of falling profits, but because with no rise in productivity caused by this existing technology, the accumulation of capital simply uses up more of the existing labour supply, and supply of raw materials.

“As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.”

Its precisely to address this squeeze on profits that capital is led to engage in a new innovation cycle to develop new technologies to replace labour, and which when they are introduced creates the conditions of rising social productivity required for the operation of the Law of falling profits. In other words, it is a consequence not a cause of crises.”
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Again all we have here is an account of the cyclicality of capitalism. Within that, as Marx makes clear, there is the structural tendency of the rate of profit to decline. This “most important law” expresses the need of capital to reduce the necessary labor time; to increase surplus value.
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Boffy: “As a Marx says, it is the Law of Falling profits that is one of the means of resolving crises not the cause of them.

“The specific feature about it is that it uses the existing value of capital as a means of increasing this value to the utmost. The methods by which it accomplishes this include the fall of the rate of profit, depreciation of existing capital, and development of the productive forces of labour at the expense of already created productive forces.” “
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Again priceless, for as everyone who has studied Marx knows, for Marx the “resolution” IS the cause; methods for recuperation are methods that reproduce the crisis. That’s not the whole point, but a really big point of Marx’s critique. The same relation that propels the accumulation of capital, the reduction of necessary labor, erodes profitability. Expansion and contraction are different moments of capital’s reproduction. The structural decline in the rate of profit is the result of the complete and continuous movement.
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Boffy: “The reason the Law of The Tendency For The Rate of profit To Fall is important to Marx’s theory has nothing to do with crises.”
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Marx calls it the most important law, and in vol 3 he points out how it does cause crises, and does lead to overproduction. In his economic work Marx at one point says that overproduction does not cause the rate of profit to fall, the fall in the rate of profit causes overproduction—a statement which in another portion of his work he directly contradicts—stating that overproduction leads to a fall in the rate of profit.
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I’m not at the level of the debate as Boffy is, though his analysis of TFRP is interesting , at least Marx in Theories of Surplus value does explain crisis in parts and his whole economics work is phenominal compared with vulgar economics now which can only
talk about prices.

Am fairly new to Marxism, am just reading capital volume 1 for the first time and have come to the chapter on “The Rate of Surplus Value”. So please forgive any ignorance!

I have a question as I fear I may not be understanding what I am reading. In this chapter Marx makes c (constant capital) equal to zero. He says that c could be zero or any value imaginable and it would not affect the rate of surplus value. Now my understanding is that the rate of profit is s/(c+v) and to some the rate of profit is the most relevant while the rate of surplus value is less important.

I guess my question is, why isn’t the rate or magnitude of surplus value the important measure rather than the rate of profit? Or maybe I should say why are you not debating the rate of surplus value in the same way as you debate the rate of profit?

Surplus value is that portion of the working day that is extracted after the time of production necessary for the workers to reproduce value equivalent to their own wages.

We have the necessary labor time, expressed as a value which value takes a monetary form as wage; ;we have the surplus labor time; which is the remainder of the time expressed as a value. The ratio between the two gives us a rate of surplus value, and indeed is important, but not “important enough.” or let’s just say not sufficient.

The value of the commodity and all commodities is not just make up of the wage, the variable capital, and the surplus value. It includes the value of all the materials and instruments of production which are consumed, subsumed in production. Those values are transferred in the production process to the commodities. Those values however do no expand capital. They are a cost that, at best, can be recuperated if and when the value of the commodities is realized. The bottom line is the proportion of total cost of production that falls into the category of profit, not simply how much more the surplus value is than the outlay for wages.

Rate of profit
this line of thoughts
Let us calculate every thing based on socially necessary hours of Labor time, and calculate for every single worker, and for every single working day .
Rate of profit = S/C+V
If P would be the amount of value produced by a worker in one hour with a given technological condition:
S/C+V can change to sP/cP+vp
s would be the time(not value) spent for Production of S( expressed as value)and c the time of production of C and, v the time spent for production of V
But s+v is maximum 24 hr if we
assume that worker does not need any rest time and all the time working
Therefore s =24-v
So rate of profit = Ps/ Pc+Pv
Or. s/c+v
Or. 24-v / c+v
Or ( 24/v ) -1 / ( c/v)+1
With advancement of technology v decreases so (24/v), increases ,
and also c/v increases
Because we are talking about long run trend , the amount of v gets very small so 24/v and also c/v will be very large numbers so we can omit -1 and +1 in formula
So (24/v) -1 / (c/v) +1 can be changed to:
(24/v) / (c/v)
Or. 24 / c
But accumulation of capital means that c is increasing ,( the time spent in production of C expressed as value)
So 24/c as the formula of rate of profit in the long run , will fall, (inspire of technological advances which increases S/V (the rate of surplus value,)

Hello Michael Roberts. This is Karl Reitter from Vienna. I just published a book against the so called Neue Marx-Lekture. (New Marx-Reading) Michael Heinrich is one of the leading figures of this current. http://www.mandelbaum.at/books/806/7553 It contains eleven articles against Michael Heinrich and Co. Now only a few comments on what Michael Heinrich said. First: When Heinrich said, you can show with statistics what you want shows this his not so secret Althusserianism. Heinrich echoes just the strange position of Althusser, that Empirical facts can teach us nothing. So we can just believe in Marx, not prove them. Second: When he said: “that a rising organic composition of capital will be accompanied by a rising rate of exploitation. We cannot know which will rise more…” so is this argument based on his rejection of connect value on real time. He used to argue simple, that the real time for producing is different from the time, with constitute the value of commodities. Yes, but I think that is quite clear in Marx, then this gap must be closed sooner or later (and opens again). But Heinrich doubt this, so her developed what I call a two-time-theorie. The real time do not constitute the amount of value in his view, but is the fictive time still a time? If you divide real time from time, that define value, you can say as he did, there is no limit for the rate of exploitation. But, as Marx do for instance in the 16. chapter of Volume one, if you insist, that you can always convert value in real time and vice versa, there is of course a clear limit to the rate of exploitation. Let’s say, one works for 12 hours a day, and the necessary labour time is one our (it will be never just seconds) the rate of exploitation is 1100%, but it can hardly increase higher. Chistoph Henning used a very similar argument in his book “Philosophie nach Marx”. Was this also your argument? Heinrich uncouple always value from real time; that explains a lot of his position.
Is there a possibility that yo come to Vienna? If you are interested to speak here, let me know. (karl.reitter@univie.ac.at)
All the best – ganz liebe Grüße
Karl